Friday, 29 March 2019

There seems to be
some confusion among some on the left about the impact of Brexit.
Statements like ‘Brexit will make austerity worse’ by Remainers
are imprecise, so let me spell this out. Because of the
controversy this generates I’m afraid this is going to be a rather
dry, analytical post. But if you think government spending
can somehow reverse the negative economic impacts of Brexit, this
post is for you.

Brexit will reduce
UK trade relative to what it would be if we stayed in the EU. How much will depend on the type of Brexit. As I outlined
here,
it will not be possible to come near to replacing that trade through
new trade deals. So less trade is a given.

Less trade reduces
GDP mainly because it reduces productivity. Trade allows
specialisation. Instead of Honda cars being produced in each EU
country they can be made in just one, which allows (in part because
of what economists call economies of scale) the cars to be produced
more efficiently. Trade also increases competition (you can buy many
makes of car in the UK) which improves efficiency. Therefore if you
restrict trade, you reduce productivity. Less productivity means less
GDP. I discussed how much GDP could fall under May’s preferred
trade arrangement here.

A reduction in
productivity is a supply side decline in GDP. It is very different
from a demand deficient recession of the kind we had after the GFC.
In a demand deficit recession fiscal policy (more government spending
or lower taxes) can be used to restore demand and therefore GDP, and
must be used if interest rates are stuck at their lower bound. The
tragedy of austerity from 2010 is that the opposite was done. The
decline in GDP brought about by lower productivity following less
trade cannot be tackled in that way.

When GDP falls,
taxes fall. To keep the deficit constant, that requires a reduction
in government spending. Brexit will reduce government spending
compared to what it would be if we stayed in the EU. To that extent
Brexit makes austerity worse. To say that those who point this out
are advocating a continuation of the policy of 2010 austerity
are wrong.

It is important to
note that what I am doing here is comparing two states of the
economy, and saying what the differences would be between those two
states. This type of comparison confuses many people. I am not saying
government spending is going to be lower than it is now - it almost
certainly will not be. People say cannot we do something to mitigate
the impact on GDP of Brexit? There are many things that can be done
to improve GDP, like more public investment, but they could also be
done if we stayed in the EU. If you think there is still spare
capacity in the economy then GDP can be raised by fiscal or monetary
policy, but that is equally true in or out of the EU.

Does government
spending have to lower out of the EU compared to inside the EU? The
answer is no, which is why statements like Brexit will make austerity
worse are incomplete. You could keep government spending at the same
level in and outside the EU. But that would raise the deficit, which
requires higher taxes. So in that case Brexit would increase taxes.
So a correct statement would be that Brexit either reduces government
spending or raises taxes or some combination of the two.

At this point you
get MMTers up in arms. The deficit does not matter for a country with
its own currency and so on. Or even worse, that government spending
determines taxes and not the other way around. This is a very good
illustration of how misleading MMT rhetoric can be. To see why, go
back to the case where government spending falls in proportion to GDP
under Brexit, which means the deficit is unaffected by Brexit. Now
suppose you increased government spending to the level it would have
been without Brexit. That is an expansionary fiscal policy, which
stimulates demand which raises inflation. The obvious way to reduce
demand and inflation is to raise taxes so the deficit is back to its
original level. It does not matter whether you need to keep the
deficit unchanged because you have a fiscal rule, or you have fiscal
policy stabilising the economy as MMT advocates, you get the same
result.

Some MMT followers
never admit they are wrong, so I got a lot of stuff about how you can
use other measures to reduce inflation like credit controls. But you
could use them if we stayed in the EU as well to allow higher
government spending or less taxes. There is no obvious reason why
leaving the EU makes such measure more effective.

The correct
statement about the impact of Brexit on the public finances is that
it means government spending will be lower or taxes higher or some
combination of the two. Furthermore the overwhelming majority of
economists think GDP will fall as a result of Brexit, and I have not
come across an academic whose field is trade economics who thinks
otherwise. If you think, as I do, that this government has reduced
public spending way beyond the level that people want, and therefore
you want to raise that spending, Brexit makes that more difficult.
.

Tuesday, 26 March 2019

There
was extensive analysis
after the UK EU referendum of the characteristics of those who voted
for Brexit and those who didn’t. A robust finding was that those
who voted for Brexit tended to be older and had less years of
education. But some noted a link between a tendency to vote Leave and
areas of deindustrialisation. The idea of the ‘left behind’ was
born. It gained force when rest-belt states in the US swung to Trump
in the same year.

This
characterisation of the left behind was attractive to many on the
left, who have been critical of the globalisation they saw as the
cause. Yet as Martin Sandbu points
out, the period of what is often called hyper-globalisation is the
1990s, and much deindustrialisation occurred before then. Some of
that was a result of automation rather than globalisation, and in the
UK 1980s deindustrialisation was hastened by a large appreciation of
sterling caused by a combination of discovering North Sea Oil and
monetarism. Why the 30 year delay for the left behind to finally find
its political voice?

If
we look at the geography of the Brexit vote, areas of
deindustrialisation is not the only thing that strikes you. Much more
obvious is that people in large cities voted against Brexit, and
those in smaller cities or towns or the countryside voted for Brexit.
The same was true for Trump, and Trumps core support comes
from rural areas. Is this simply a consequence of differences in age
and education already discussed?

It
could well be. As the Centre for Towns showed,
UK villages and towns have been getting older and cities have been
getting younger. Jobs that attract the university educated tend to be
in cities rather than in towns and villages.The old tend to be more
socially conservative, and so are attracted to the anti-immigration
message that was a key part of the Leave and Trump campaigns.

There
is no doubt these factors are important, but do they explain all the
the geographical nature of the support for Brexit and Trump, or is
there more to it? I think the gilet jaunes from France can shed some
light on this question. As John Lichfield outlines,
the gilet jaunes come from peripheral France: the outer suburbs and
countryside. That may include some areas of deindustrialisation but
it goes well beyond that. Their protests are self-organised and
remarkably persistent. They do not fit any clear left/right
categorisation. Immigration, or race, are not high up among their
concerns, which is why they do not feel represented by the far right
party of Marine Le Pen.

What
do the gilet jaunes want? Specific demands are varied and often
contradictory. But a dominant theme is that they want to be valued
and represented. They feel that the centres of power in France, the
government but also other organisations, do not speak for or even
respect them. They think the major cities are getting all the
benefits of growth while they are falling behind.

The
gilet jaunes tend
to be working or lower middle class, sometimes self-employed,
sometimes retired. Initially their protests were sympathetically
viewed
by most French voters, which was one reason why Macron responded with
tax breaks for pensioners and low income workers. As time goes on and
the violence has continued their popularity among French voters has
waned. Whether they have a future as a coherent force may depend on
whether they can transform themselves into a conventional political
group that wins seats in the forthcoming European elections, a
process which has already led to some fragmentation along traditional
left/right lines.

Macron’s
election as President of France had led many to think that the wave
of populism influencing democracies around the world could be held
back or even beaten. What the gilet jaunes show is that this cannot
be done just by electing a charismatic President. Indeed the
character of Macron, clearly part of an affluent city elite, may even
have been a provocation.

Can
the gilet jaunes tell us anything about those who voted for Brexit or
Trump? All three movements come from outside of the main cities, so
perhaps geography is more than just an incidental factor. What is
unique about the gilet jaunes has been self-organisation, made
possible through social media, and the variety of their political
demands. In contrast Trump is a Republican, and Brexit is a very
specific cause. But perhaps this difference just reflects the ability
of some politicians and parts of the media to capture the discontent
of the geographical areas that feel left behind?

The
EU was not considered an important issue among most voters until the
referendum. Immigration was, but a good part of that was because the
government and press had managed to deflect anger at declining public
services and wages on to immigrants rather than their own policies.
Whereas the gilet jaunes had to organise themselves using social
media, Brexit and to some extent Trump had sections of the
conventional media to do that job. While many gilet jaunes want to
overturn the government, Brexit supporters succeeded because they had
the help of politicians and the media.

Underlying
causes in all three cases include geographical and financial
inequality, and a feeling of being ignored by conventional politics.
In the UK, looking mainly at the first decade of the century, a NEF
report
found that nearly all of the 20 fastest growing constituencies were
in cities. Often the prosperity of towns depends
on the success or otherwise of a nearby city. Those in the periphery
see money going to projects like crossrail or HS2 while local bus
services are cut.

People
look at others to measure their own prosperity but they also look at
their own past. In the UK real wages are still below levels before
the financial crisis, and in the last year the disparity between the
incomes of most people and those at the top of the income
distribution has started
to increase again. (It is one reason why the Chancellor is getting
more tax receipts than he expected.) In the US most of the proceeds
of growth have for some time been going
to the top of the income distribution.

We
can see the same thing, although to a lesser degree, in France. Here
is a revealing graph from a study
by Thomas Piketty and colleagues. It shows how average annual growth
rates of pre-tax income has varied by where people are in the income
distribution over three time periods. To the right we have the richer
income deciles, including at the end the top 1%, 0.1% and 0.01%
respectively. In the two periods before the 1980s incomes at the top
grew less rapidly than all other groups. From 1983 to 2014 the
opposite has been true: growth rates of top incomes have been up to
three times those of everyone else. In addition the growth rate of
incomes of the non-rich have been historically low.

Low
average growth in most incomes together with much faster growth in
incomes at the top is provocative, particularly if you are in parts
of the country that are stagnating with few prospects. I do not think
it is any coincidence that a week ago we saw
the gilet jaunes targeting the exclusive shops and restaurants of the
Champs-Élysées.

Inequality
based on incomes or geography is not enough to get the gilet jaunes
on to the streets, to get UK voters to want to take back control, or
Trump voters to vote for the worst President in a century. This also
requires a feeling that your voice is not heard in the political
process. In the UK a feeling of powerlessness was hijacked by
politicians and the press who pretended it was a result of the EU, or
in the US by Trump who pretended to speak for ‘real America’.

Speaking
up for those left behind should naturally be something parties on the
left do. Yet in the UK, as the NEF report shows,
Labour have been increasing their vote share in dynamic cities and
the Conservatives from areas in decline. This may be part of a longer
term trend in both the UK, US and France, where the left party that
once represented the less educated now is the party of the educated.
The chart below taken from another study
by Piketty shows this trend, which he calls it the emergence of the
“Brahmin Left”.

Yet
I think this alone is an incomplete explanation. To explain recent
developments we should add the adoption by traditional left parties
of a neoliberal framework which discouraged regional, industrial and
redisributive policies that might have transferred more of the
benefits of city dynamism to the periphery. That created a left
behind that went beyond areas of deindustrialisation, that felt
unrepresented and deprived, and which in the UK and US was open to
capture by a populist right.

Friday, 22 March 2019

Before deciding
that I’m writing about Labour when I should be writing about the
disaster that is Theresa May, please read to the end.

As it becomes
obvious (sort of) that there is no majority among MPs for a People’s
Vote (something that has actually been clear
for some time), the argument has been made
that this justifies Labour’s failure to support a People’s vote
and instead to seek a compromise, a softer Brexit. I have talked
about the wisdom of compromise over Brexit before,
but I want to make a different point here, about the stance that
Labour has taken over Brexit.

In 2015 Labour lost
a General Election where the strong card, perhaps the only strong
card, of the Conservatives was their handling of the economy: in
other words austerity. It would therefore not be ridiculous to claim
that the vote was a verdict on austerity. Some Labour MPs did just
that, and argued
that if Labour were to win the next election it had to match George
Osborne’s policy.

Thankfully on that
occasion a new Labour leadership did not take their advice. There
were three compelling reasons to continue to argue against austerity
- indeed to argue against it much more strongly than Balls and
Miliband had done. First and most importantly, it was a policy that
made pretty well everyone worse off, and almost certainly
led to premature deaths. Second, austerity was a policy that was very
unpopular among party members. Third, there were good reasons to
believe that the popularity of austerity among the public at large
would fade away over time.

I think all these
points apply to Brexit as well. Does the fact that 2016 was a
referendum while 2015 was a General Election make a difference? Here
we have to talk about the nature of the 2016 referendum result. It
was not, and could never be, an unconditional instruction to leave
under any circumstances. As the form of leaving was unspecified, and
the conditions under which we would leave were strongly disputed
(with the winning side proving to be completely wrong), it should
only have been a request for the government to investigate how we
might leave.

It was also won
narrowly, with the winning side spending significantly more than was
legal. That alone casts a question of legitimacy over the result. I
find it extremely odd that some on the left say otherwise, and
suggest Remainers have to prove that the additional spending made the
difference, something that it is almost impossible to do. Do they
realise the precedent they are setting? The right always has more
money for obvious reasons, and if the only consequence of
overspending by the right is a fine then that is an open invitation
to try and buy elections.

Labour’s early
approach to Brexit was successful in avoiding the 2017 election being
a rerun of the referendum, but there were other ways of doing that. A
reasonable strategy that would have achieved the same end was to
accept the vote (obviously), but to reserve judgement while the
government was negotiating. It would make sense to put down markers
about being extremely skeptical that Brexit promises could be met
and, crucially, whether a deal that was beneficial could be found.

As the outlines of
the government’s deal became clear, Labour should have done what
was right and what its members wanted, and campaigned for a second
referendum. Once Labour had to put its cards on the table,
triangulation ran out of road. The case for a vote on the final deal
became unassailable once it was clear Leave promises about what the
EU would do were worthless, that there were alternative ways of
leaving each of which had some public support, and the public were
not getting behind Brexit but were still deeply divided about whether to Leave and how to Leave.

The Labour
leadership’s arguments against doing that were of exactly the same
form of those who wanted to adopt Osborne austerity after 2015: the
policy that members wanted was seen as a vote loser. Even if they are
right about backing a second referendum being a vote loser (and I
strongly suspect
they are wrong), the only argument I can see for treating austerity
and Brexit differently is a belief that one matters much more than
the other, and such a belief is very misguided.

What about the
argument that there are not enough MPs in parliament to support a
second referendum? In my view that is an entirely separate point. In
general opposition parties cannot get their way, but that does not
mean they stop campaigning for what they think is right. It may well
be that parliament will never vote for a second referendum, and some
compromise - a softer Brexit - is all that can be achieved. I hope
that is not the case, but it could well be. But that does not mean a
party should start off campaigning for the compromise you may be
forced to reach, rather than campaigning for what is right.

Some people argue
that we have to support Brexit to show solidarity with those left
behind who support it. That ignores those left behind who voted
against it, but even so it is not a good way to proceed. You could
say exactly the same about immigration, which many of those left
behind blame for their situation. It would be quite wrong for Labour
to adopt an anti-immigration policy they did not believe in just to
show solidarity with those who wanted it. The same is true of Brexit.

But I have to make
one final, and critical, point. I think Labour’s Brexit policy is
tragic because it has, directly or indirectly, diminished support for
Labour and its leadership among many people who might vote Labour. By triggering Article 50 Labour bear some responsibility for Brexit, and I have suggested before that the successors to the current leadership should come from those who voted otherwise. However I cannot say with any certainty at all that Labour’s policy
has had any effect on the Brexit process as such. It is not at all clear that if Labour had adopted the stance I suggest above it could have stopped Brexit, This Brexit mess is entirely Tory affair. To quote
Alison McGovern, “This is a Tory problem, a Tory solution and a
Tory obsession.” It is Tory disunity and madness that has delayed
Brexit. It is a terrible Tory Prime Minister that has made democracy
in the UK become a laughing stock among the rest of the world. Those who claim the Tories and Labour are equally to blame or equally responsible for Brexit are wrong.

May's speech to the
public on Wednesday night was Trumpesque, and extremely dangerous.
She blamed MPs for delaying Brexit when she had delayed one vote for
no good reason, and then basically said its my deal or no deal. She
pretended she was acting for the people while parliament was
frustrating the people’s will, when in reality less than 40% of
voters support her deal and parliament is reflecting that. She seems
on the point of taking us over the cliff edge and it is only Tory MPs
that can stop her. To make such an authoritarian, populist speech
without realising what she was doing tells you all you need
to know about her character and political ability.

Her proposal to the
EU only made sense if she was prepared to leave with No Deal, which
in turn signals to the ERG that they should not vote for her deal.
The EU is much too sensible to agree with that, and has in effect given
parliament three weeks to work out an alternative to May’s deal.
That requires Tory MPs to cooperate with the Labour leadership,
something they have not yet been prepared to do [1]. To the many who
suggest that somehow the Labour leadership could have prevented the
mess we are in I say show me how you can be sure of that, because to
me this looks like all the Tories own work from David Cameron to
today.

[1] If Tory MPs do finally have serious discussions with the Labour leadership, the Single Market is critical. If all the leadership does is demand to stay in a Customs Union (something inevitable with May's deal given the backstop), it will be equally responsible for the damage caused by leaving the Single Market. Phrases about 'access to' or 'staying close to' the Single Market bind the government to nothing.

Tuesday, 19 March 2019

It now looks like May
will not get a chance to put her deal to parliament for a third time
today, thanks to a ruling from Speaker Bercow. Yet while some
compare Theresa May’s relentless and humiliating quest to get her
deal passed by parliament to the Black Knight
from Monty Python’s the Holy Grail, and Bercow believes the deal
has to change for it to be voted on again, there would have been a
critical difference this time.

Previously rejection
has meant nothing except that we get closer to leaving without a
deal. No deal is what economists might call the ‘bliss point’ of
many Brexiters. The outcome most Brexiters want is what they call a
‘clean break’ with the EU. Before parliament agreed to delay
rather than crash out, it was obvious the Brexiters would vote
against May’s Withdrawal Agreement.

If the Withdrawal
Agreement had been voted on today (and May could well have pulled it
herself anyway because she believed she would lose again), rejecting
it would have almost certainly meant a long delay to Brexit rather
than crashing out. That may be a crucial difference for many
Brexiters, including the DUP. A few have already said that they would
have supported May’s deal this time, and others appear to be
looking for ways to change their minds. So the vote would have been
closer than last time it it had been held.

Given this, I have
never understood why May kept No Deal on the table for so long. It
was obvious that most Brexiters preferred No Deal and would therefore
inflict embarrassing defeats on the Prime Minister. In contrast the
threat of No Deal does not seem to have kept the few MPs on the
opposite wing on board. All I can assume is that she really believed
the David Davis mantra that the EU would cave at the last minute for
fear of the impact of no deal. If so that was a huge misjudgement, to
be added to the already long list of huge misjudgements
she has made over Brexit.

Now she has finally
said a long delay is the alternative to her deal passing, the
Brexiters would have a real dilemma if the deal was voted on again. A
long Brexit delay does not take No Deal completely off the table, but
it makes it much less likely than before. It also increases the
possibility of a second referendum. To understand the dilemma the
Brexiters would have if May were allowed to and had put her deal to
parliament for a third time, we have to enter the make-believe world
of ‘Global Britain’. Of course Global Britain appeals to the
English
nostalgia for empire that runs deep within Brexit, but to most
Brexiters it is much more than that.

Conventional
economic analysis tells us that leaving the EU’s Customs Union and
Single Market will reduce the amount of trade the UK does with the
rest of the world. The reasons are obvious, and I think are privately
accepted by most Brexiters. Their main line of defence during the
referendum was that the EU would give us all the benefits without the
costs, which we now know conclusively is not true. While some
Lexiters might be attracted by the idea of a less global UK (because
they blame globalisation for deindustrialisation), Brexiters do not
want less trade. Their idea of Global Britain was to do more trade
with non-EU countries to offset, in the longer term at least, the
loss of trade with the EU.

The Irish backstop
in the Withdrawal Agreement (WA) effectively rules out Global
Britain. Most trade deals involve tariff reductions, and if the UK is
in the EU’s Customs Union it cannot unilaterally reduce its tariffs
to make new trade deals. Theresa May and Liam Fox may pretend
otherwise, but most Brexiters know this to be the case. The more May
moves to appease the DUP by promising that EU rules in Northern
Ireland will also be adopted by the rest of the UK, she restricts yet
further the scope of independent (from the EU) UK trade deals.
Without tariff reducing trade deals with emerging countries and the
US, Brexiters believe there will be a decline in the amount of trade
the UK does with the rest of the world, and that will be harmful to
the UK economy.

That is why some
Brexiters insist that May’s deal is worse than staying in the EU.
But others will point out that the WA does allow the UK to move away
from many of the rules of the Single Market, which in their eyes is
an important part of Brexit. A few may pretend to themselves that the
backstop can still somehow be subverted once we have left, or even
that No Deal can still be achieved after approving the Withdrawal
Agreement by rejecting enabling legislation. They may say that it
would be extremely ironic and embarrassing if Brexiters by their own
actions stopped Brexit happening. Those still opposed to May’s deal
will respond that those who vote for it own it, and if trade and the
economy subsequently decline voters will blame those who voted for
May’s deal.

Behind all this is
the influence of Conservative members. The departure of Nick Boles,
who left
his Conservative Association before he was pushed, reflects a new
mood of militancy among the Tory grass roots. Boles had voted for
May’s deal, and his crime in the eyes of party members was that he
also campaigned against no deal. With some of the Brexiters hoping to
succeed May, their decision is all about pandering to this
electorate.

In truth this debate
is upside down compared to the real world. I describe Global Britain
as make-believe because all reputable studies suggest new trade deals
cannot come close to offsetting lost EU trade. A key reason is what
economists call gravity. Gravity is the observation that countries
trade more with their neighbours than those far away, a robust
finding that appears to hold despite falling transportation costs.
That means that even if the UK after Brexit could get lots of tariff
reduction deals with countries outside the EU (a big if), this would
not come close to making up for the lost trade with the EU. The
government’s own analysis comes to the same conclusion. By keeping
us in the Customs Union, May’s deal actually helps the economy,
although as I outlined
last week leaving the Single Market is still very costly.

Brexiters always
refer to how much faster countries outside the EU are growing. But
this is like giving up your solid 40 hour a week day job to work just
one hour a week for a rapidly expanding firm for the same hourly pay.
Because the firm is rapidly expanding you could be working 2 hours a
week within 10 years! This is something few in their right minds
would do in real life, so why should we do the equivalent as a
country?

Brexiters prefer to
ignore the analysis of the overwhelming majority of economists, and
instead look to the tiny group of Economist for Free Trade (EFFT).
But as Chris Giles has recently shown,
if you look at how the GDP forecasts of various groups just after the
referendum have been doing recently, those of EFFT have been wildly
optimistic compared to others. As the chart shows, EFFT (then
Economists for Brexit) did well in the first few quarters after the
referendum because many consumers dipped into their savings, but by
the end of 2018 EFFT were doing much worse than the OBR, Bank of
England and the consensus of private sector forecasters. Giles sums
this up by saying “The lesson is simple: listen to economists, but
not to those peddling a political line.”

So the only
economists who really believe in Global Britain have already been
shown to be far too optimistic about the impact of Brexit. No doubt
they would say that is because May’s deal prevents Global Britain,
but it is clear from movements in sterling that the foreign exchange
markets fear No Deal most of all because of the impact this would
have on trade. The Brexiters have a wonderful way of avoiding these
facts. As the consensus among economists is that trade will suffer if
we leave the EU, economists overwhelmingly favour staying in the EU.
The Brexiters then conclude that if they favour Remain they therefore
must be biased. Ergo only the predictions of economists who believe
in Global Britain can be trusted!

There would be a
certain horrible symmetry if May’s Brexit deal had passed this
week. It would have been a narrow victory, just as the EU referendum
result was narrow. It would be a victory tainted with public money
used to bribe Labour MPs and the DUP, while the referendum vote was
won by the Leave side spending much more private money than the rules
allowed. Both victories would have been won against a weak and
divided opposition: Cameron unable to talk about the virtues of
immigration and Corbyn unable to campaign against Brexit. Both May’s
deal and the referendum victory are based on lies designed only to
get them across the line. Both are blind, with no clear idea of the
kind of Brexit that will follow. Both therefore fail basic notions of
legitimacy.

If Bercow prevents
May putting her deal before parliament again in the near future, or
if she decides herself she would not win anyway, then her failure to
pass her deal on 12th March involves a delicious irony.
Brexit failed to happen because of the actions of Brexiters
themselves, because they actually believed one of their own lies: the
make-believe of Global Britain.

Friday, 15 March 2019

Brad DeLong
describes
himself as a Rubin Democrat, which he defines as “largely
neoliberal, market-oriented, and market-regulation and tuning aimed
at social democratic ends.” It is a natural position for an
economist to be: it is generally more efficient to tweek markets than
destroy them. But he thinks the time has come for this kind of
Democrat to pass the baton over to the left. “We are still here,
but it is not our time to lead.”

That is an unusual
thing to say, on either side of the Atlantic. In the UK the left
under Corbyn is in the lead, but you see few of the people who used
to run the Labour party saying anything similar. Instead some have
conducted a relentless campaign to undermine him. Not only is DeLong
unusual, I also think he is probably right, so I want to examine the
reasons he gives.

The key point he
makes is that the political right has torn up the normal rules of the
game, by both moving further to the right and becoming totally
partisan. This was very clear in the Obama years. Obama pursued
Romney’s health care policy and John McCain’s climate policy and
George H.W. Bush’s foreign policy. “And did George H.W. Bush, did
Mitt Romney, did John McCain say a single good word about anything
Barack Obama ever did over the course of eight solid years? No, they
fucking did not.”

There is much less
bipartisan cooperation in the UK compared to the US, but I think
there is a clear analogy with triangulation. The lesson Brown and
Blair drew from the defeats of the 1980s was that Labour needed to
win the middle class, and that meant moving policy to the centre
ground. There was little attempt to reverse the neoliberalism of
Thatcher, but instead to mitigate its social effects.

But the problem is
that the political right in both countries were not playing by the
same rules. They had a quite different strategy, which was to shift
policy on issues like taxation and the size of the state to the
right, and instead try and win elections by pushing a socially
conservative agenda. (Here
is a formalisation.) There is no triangulation here, but instead an
attempt to hide a right wing agenda by starting a culture war. [1] As
the right has control over a section of the media, they can also
misrepresent their own and their opponents position. That control,
together with ineffective scrutiny by the non-partisan media, allows
politicians to lie to an extent that would have been thought
inconceivable a couple of decades earlier.

When the right
adopts this strategy (what I have called elsewhere
neoliberal overreach), attempts by the left to get bipartisan
agreement or triangulate policies moves what most political
commentators call the centre ground of policy to the right. This has
two effects. The first is that policies that would be popular among a
majority of the population don’t happen. It is often noted
that Corbyn’s policies are popular, and the same seems
to be true in the US. Second, those supporting the left wing party
become dissatisfied with it, and try and move it back to where it
once was.

A vivid illustration
from the UK of how triangulation fails is immigration. The
Conservatives, together with their allies in the media, decided to
use immigration as a major weapon against the Labour government.
Gradually the increase in the number of stories about immigrants
living on welfare and ‘taking our jobs’ began to move immigration
up the list of issues voters were concerned about. Immigration
numbers were increasing because the government knew this was good for
both the economy and public services, but newspapers used
words like “mass”, “vast”, “large scale”,
“floods”,“waves”“army”, or “hordes”. With a few
exceptions it was not voters in areas where migration was increasing
that were reacting,
and the best predictor of voter concern was which newspapers voters
read.

Eventually Labour
decided they had to try and triangulate, by talking tough on
immigration. The case for immigration was no longer made. The false
belief that immigrants made access to public services worse became
ingrained. This allowed the Conservative government to deflect a lot
of anger over austerity on to immigrants, and it eventually led to
Brexit. The strategy of triangulation was a disaster. It is
interesting that since the negative impact of reduced immigration on
the economy has become clear with Brexit, views on immigration in the
UK have shifted
to become positive rather than negative.

Another consequence
of the right not playing by the old rules is a lack of
proportionality. I remember reading Paul Krugman during the Clinton
vs Sanders primaries. I think Paul mainly favoured
Clinton because Sanders was too populist, which naturally grates for
someone who knows and cares about the detail and the difficulties
involved in populist policies. But I also remember him writing that
the Republicans might be hard on Clinton but that would be nothing
compared to what the right would do if Sanders was the Democratic
candidate. I’m not sure that was correct, because the right were
not playing by the old rules where you had to stick to facts.

As a result, Clinton
was accused of all kinds of imagined crimes by Trump, and the
non-partisan media played along by obsessing about her email server.
Much the same happened in the UK if we look at the 2015 and 2017
elections. The right wing press relentlessly attacked Corbyn in 2017
with wild charges about what he would do as PM, but what they did to
centre-left Ed Miliband (‘red Ed’) in 2015 was not that
different. Their attacks were not proportionate to how left wing
their opponent was.

I think you need to
add in one additional point here, and that is a public that is
looking for radical solutions, by which I means solutions that move
away from the status quo. The reason for this is not hard to
understand: the worst recession since WWII following the financial
crisis, stagnant and declining real wages, and geographical areas
(rural, towns) that seem to be falling behind more dynamic cities.

The lesson of Brexit
and Trump is if you fight a culture war and lies with just well
researched and targeted policy proposals, you lose. It is better to
fight a culture war with an alternative vision and popular policy
proposals, and a bit of class war too. I am not suggesting that you
don’t have well researched and targeted policy proposals behind
that: as DeLong says “we are still here”. But this is the time
for radicals on both sides. I suspect Sanders would have been more
effective than Clinton at taking on Trump, just as Corbyn was very
effective at taking on Theresa May.

You might have
noticed that I have said very little about policy divisions between
the left and centre-left, and that is because in practice I don’t
think they are very important. In both countries the left cannot
implement much that the centre-left disagrees with, and much of what
the left want to do the centre-left are prepared to accept. [2]
(Maybe not rich Democrat or Labour donors, but crowdfunding means
that is unfortunate rather than fatal.) The key question is whether
the centre-left allows the left to lead when it needs to lead, or
instead fights against the left and keeps the right in power.

Let me end with Brad
again.

“Our current bunch
of leftists are wonderful people, as far as leftists in the past are
concerned. They’re social democrats, they’re very strong
believers in democracy. They’re very strong believers in fair
distribution of wealth. They could use a little more education about
what is likely to work and what is not. But they’re people who
we’re very, very lucky to have on our side.”

Some in the UK may
feel that statement just does not apply here, but they need to ask
whether DeLong is right and it is the left’s time to lead, because
what he says about the political right in the US applies equally to
the UK.

[1] Cameron talked
the talk of centre triangulation, but that did not happen in practice
(with the exception of one or two issues like Gay marriage and the
aid budget). With austerity he pursued an attempt to shrink the state
that Thatcher could only dream of, and the degree to which the Tories
wanted to shift policy to the right was masked by the Coalition’s
other partner.

[2] One of the
problems we have in the UK is supporters of the left who do not
understand this, and act as if the centre-left is the enemy and it
can win without them. But the centre-left also needs to recognise
that on some big issues like financialisation they have been wrong
and the left has been right. Some discussion on US issues here
from Paul Krugman.

Tuesday, 12 March 2019

Trade
negotiations happen after the Withdrawal Agreement (WA) is signed, so
why don’t those wanting a softer Brexit just vote for the WA and
argue about trade later? The Political Declaration which does talk
about trade is vague and non-binding. The reason is straightforward.
Parliament will get very little say on the framework for those trade
talks. The only real chance most MPs will get to influence the type
of trade relationship the UK has with the EU is by directing the
government now, as the price of passing the WA.

However
so far parliament has largely failed to do that, largely because
Conservative MPs have put party unity above the future health of the
country. So what will happen to politics and the economy if
parliament votes to pass May’s deal, either today or in a few
months time? The first and well known point to make is that nothing
would immediately change as far as UK firms and citizens are
concerned, because we would start a transition period where we remain
inside the Customs Union (CU) and Single Market (but no longer have
any say on the rules of either). There will be little economic bounce
from ending No Deal uncertainty, for reasons outlined below. So the
immediate action will be about the politics of negotiating what
happens after the transition period ends.

If
you want to know what that would be like, just look at the last year
or two. Most of the arguments within the Conservative party over the
last year or so have been about trade, and not the content of the WA.
So signing the WA settles very little. It does mean that we have
signed up to the backstop, but May still pretends that this backstop
means we can still stay outside the CU. I cannot see Brexiters meekly
accepting that the UK should join the CU either. We will continue to
have endless discussion of unicorn ‘alternative arrangements’ for
the Irish border designed only to avoid us being up to a CU. The
inevitable truth
of course is that the backstop implies some part of the UK has to be
in the CU, but as the last two years have shown large parts of the
Conservative Party refuse to accept reality when they don’t like
it.

At
some point during the transition period Theresa May could be replaced
as Prime Minister. It seems very likely, given the views of
Conservative Party members on Brexit, that a Brexiter will be elected
in her place. The likely outcome of that, as far as Brexit is
concerned, is either that nothing changes, or that the government
attempts to persuade the EU to do the impossible.

For
example Theresa May is determined that we should leave the Single
Market (SM) because her primary aim is to end Freedom of Movement
(FM). Any successor is likely to want to leave the SM because they do
not want to be bound by EU regulations on minimum workers rights or
the environment. Because of the economic damage that will cause (see
below) the government will attempt to get a trade agreement with the
EU that mitigates that harm. They will find out, yet again, that it
is impossible to get anything close to the benefits of the SM without
being in the SM. And because the UK will not want to accept that, the
negotiations will go on and on.

But
at least No Deal will be off the table? Unfortunately just as you
think you have avoided one cliff edge, another appears. If no trade
deal is done during the transition period, we crash out much like we
would with No Deal now. And the Brexiters in government will be
saying not to worry the EU always cave at the last minute. They will
fight extending the transition period from 21 months, even though it
is impossible to negotiate a trade agreement in that time, because
the ERG wants to fall off a cliff.

In
short, if May’s deal is approved we can look forward to a politics
dominated by internal squabbles within the Conservative Party, and
the absence of constructive negotiations with Brussels, for perhaps
the next four or more years. Much as we have seen for the past two
years. This is because the WA does nothing to resolve internal
Conservative conflicts, and more fundamentally conflicts inherent
with Brexit itself.

If,
despite it all, the government manages to negotiate a trade agreement
with the EU, what will be the economic and political consequences for
the UK? Will it all be worthwhile in the end? A good guide to the
economics is the study
involving a collaboration between the Centre of Economic Performance
and The UK in a Changing Europe, which is both authoritative and
representative of similar work. They believe that from 2030 onwards
UK GDP per capita will be lower by between 1.9% and 5.5% as a
consequence of leaving the Single Market. The midpoint of that range
represents lost resources for each household of about £3,000 each
year. There will of course be a large hit to the public finances,
implying higher taxes or less public spending, even after allowing
for an end to contributions to the EU.

Why
such a large range? The 1.9% mostly comes from the direct effects of
lower and more costly trade, using standard trade modelling
techniques together with reasonable estimates of the barriers created
by leaving the SM. The government using a similar model get similar
numbers. The higher figure in the study’s range is based on
empirical evidence for the impact of trade on productivity, which
captures other effects such as lower foreign direct investment or
reduced competition. Because the empirical evidence captures many
more effects than the model, we would expect it to be larger. Those
who dispute numbers of this scale in this range have to explain not
only why the models, including those used by the government, are
wrong but also why the simple correlations between trade and
prosperity more than back the models up.

Our
best guess is that we have already lost over 2% of GDP as a result of
stagnant investment and sterling’s depreciation. As a result, most
people will probably not notice the economic impact of ending the
transition period, because most of the firms that were going to leave
will have already left as a result of cliff edge uncertainty. Instead
Brexit will be a gradual decline in the UK relative to the remaining
EU.

What
about Global Britain? Most trade agreements involve tariff reduction,
so being in the CU largely limits the scope for Mr. Fox to do new
trade deals. In addition, who would want to harmonise their
regulations with the UK, when the gains from doing the same for the
EU are much greater. A more likely outcome is that we harmonise our
regulations with the US.

The
government will be desperate to sign a trade deal with the US to show
that ‘global Britain’ is more than a slogan, and that means the
US will largely get their way in terms of regulations (including food
standards) and participation in the NHS. Thus the longer term
political consequence of parliament agreeing to May’s deal is the
gradual transition of the UK into a US style economy.

In
an age where the regulations governing trade in goods and services
are increasingly decided by large regional blocks, the only
rationalisation of Brexit that makes any kind of sense is that we
move from the EU block to the US block. That is what a lot of the
Brexiters want, which is why they resist the backstop so much,
because that ties our tariffs to the EU. But the political
consequences of tariffs are less important in shaping an economy than
regulations on things like working conditions and the environment.
That is why, even with the backstop, Brexit will mean we will become
more like the US economy. Whatever the merits or otherwise of that, a
big difference is that we had a say in how the EU is run but we will
have none in what the US does. A 51st state without representation if
you like. Taking back control it is not.

Friday, 8 March 2019

The answer is
probably not: a simple balance budget is worse. The German
Schuldenbremse fixes
the total cyclically adjusted deficit at 0.35% of GDP, which implies
a gradually falling debt to GDP ratio. If actual outturns exceed this
figure, there is a control mechanism which reduces the permitted
deficit to get the path of debt back on target. So this debt brake
improves on a simple balance budget by allowing a very modest deficit
and cyclically adjusting. On the other hand it is worse than a simple
balanced budget because it error corrects.

The fundamental
mistake the rule makes is to make control of debt its central aim.
Doing this only makes sense if you ignore macroeconomic common sense.
The deficit and debt are macroeconomic shock absorbers. Running a
variable deficit allows taxes and spending to be reasonably stable,
which is beneficial for obvious and not so obvious reasons. Trying to
tightly control the deficit and debt does the opposite. It makes
sense to smooth taxes and government spending, but no sense
whatsoever to smooth the deficit and debt.

The aim of a good
fiscal rule is to eliminate deficit bias, which is the tendency of
government debt to rise over time because, for example, politicians
always want to spend more and tax less. The timescale for deficit
bias is decades rather than years, so there is no need in principle
to tightly constrain year to year deficits, or worse still to try and
stay on some path for debt, and as I have already noted it is
actually harmful from a macroeconomic point of view to do so.

Doesn’t the debt
brake make some concession towards the macroeconomic stabilising role
of the deficit by cyclical correction? There are two problems here.
First, cyclical correction is a very imprecise art, and there is
evidence
the method used in the German debt brake and elsewhere does not work
very well. Second, cyclical shocks are not the only thing that
disturbs the government’s deficit. In practice all kinds of things
can lead to erratic movements in the deficit, and it makes no sense
to have to adjust tax rates or spending to exactly offset this
erratic behaviour.

As Jonathan Portes
and I explain in our paper
on fiscal rules, a better way of keeping the stabilising role of
deficits while still ensuring they do not steadily increase over time
is to have a rolling target for the future deficit. Five years
is the typical length of an economic cycle, so looking ahead five
years makes sense, and also avoids the need for imperfect cyclical
adjustment.

This kind of rolling
future target is open to cheating, because the government can always
promise but never intend to deliver on meeting the target. The
problem here is that governments can cheat in so many ways when it
comes to fiscal planning. No rule, even a draconian one like the debt
brake, will stop all forms of cheating. The best way to avoid
cheating is to establish a fiscal council with political weight that
can distinguish between a government that fails to meet its targets
through bad luck and one that fails because of cheating.

Do we need the debt
error correction in the debt brake? A consistent result in academic
research is that debt correction should be very slow, if it happens at all. That happens
automatically with a deficit target, while the debt brake corrects
too quickly. So the answer is no.

Another problem
with the debt brake, alongside many other fiscal rules, is that it
has a target for the overall deficit which includes public
investment. Public investment should not be included in any deficit
target, because there is no reason the current generation should pay
for something that will benefit future generations. As investment is
less painful to cut than current spending (or raising taxes), rules
for the total deficit often lead to under investment, and we can see
this in Germany. That only hurts future generations.

This is not about
Anglo-Saxon economists telling Germany what to do. There are plenty
of German economists who also see that the German debt brake makes no
sense, and anyway economics is universal. The debt brake is a bad
fiscal rule. It is doing the German people harm. It needs to change.

Tuesday, 5 March 2019

There
is no doubt that the last decade has been a terrible period for
average real wages in the UK, with levels still below
where they were before the Global Financial Crisis. It is very
tempting to related this to the weak baragining power of workers.
After all, we were being told before Brexit that the economy was
strong, so if the benefits were not going to wages they must have
been going somewhere else. Some people go further and say that one of
the reasons that the bargaining power of UK workers is weak is
because of high levels of immigration, and that therefore immigration
must be responsible for lower real wages.

What
people often forget is that real wages depend as much on prices as
nominal wages. If nominal wages in the economy as a whole rise, firms
can just pass additional costs on by raising their prices, leaving
real wages unchanged. Equally if nominal wages are depressed because
of weak bargaining power or immigration, firms are able to cut prices
to become more competitive, rather than keep prices unchanged and
raise their profits.

To
see what firms have done on average we can look at the chart below,
which shows the percentage shares of profits and wages in national
income over the last thirty years. (They do not sum to 100 because of
factors like self employment income and sales taxes.) The share of
wages and profits in national income have been remarkably stable over
the last two decades. It is simply not the case that bosses have been
expropriating the gains from growth over the last decade.

So
what does explain why real wages are still lower than before the
Global Financial Crisis (GC), when the size of the economy a whole
surpassed its pre-GFC level in 2013?

The
first explanation is that GDP is not the right measure to use if you
want to know about standards of living, because it can increase just
because there are more people producing things in the economy. A much
better measure is GDP per capita (GDP divided by the total
population), and that only surpassed pre-GFC peaks at the end of
2015. It is one of the great ironies of UK politics (and a big media
failure) that the growth the Conservatives like to boast about is in
good part due to immigration they want to stop.

Yet
GDP per capita is still higher than it was pre-GFC and real wages
are not. The main reason for that is the exchange rate. We have had
two very large depreciations since the GFC: one that happened as the
crisis was unfolding and one as a result of the Brexit vote. This
raises the price of imported consumer goods, which reduces real wages
relative to GDP per capita. Another way of making the same point is
that although each worker is producing a bit more stuff than pre-GFC,
that stuff buys less overseas goods than it used to, which means
workers are worse off.

The
first depreciation probably reflected in part our dependence on a
financial sector that was hit by the GFC, but the Brexit depreciation
was a completely self-inflicted wound. But that aside, the overall
message is that the main reasons for lower UK real wages are stagnant
productivity and a decline in sterling.

Does
this mean that weak bargaining power has nothing to do with weak UK
wages? There are two potential reasons why there could still be some
connection. First, there is some evidence
that individual firms that have some monopoly power now share less of
their surplus profits with workers than they used to, and that might
well reflect weaker bargaining power. Perhaps the UK aggregate profit
share might have fallen over the last decade if it hadn’t been for
these firms passing on less of their surplus to workers.

Second,
it might be the case that one reason why productivity is so poor is
that nominal wages have remained low. If nominal wages rose because
workers had more bargaining power, that might induce some firms to
investment in labour saving machinery. This is an argument I examine
in a new article
in a special edition of Political Quarterly on post-Brext policy.

We
have one clear recent piece of evidence on what happens if you raise
nominal wages, and that is when minimum wages are increased. If
George Osborne’s hike in minimum wages raised labour saving
investment and productivity then no one has noticed. More seriously,
the near consensus of the empirical literature on minimum wages is
that increases generally do not reduce employment, and that appears
inconsistent with those increases promoting labour saving investment.
Now an increase in the minimum wages is not exactly the same as an
increase in the bargaining power of workers, so this piece of
evidence is not definitive, but as yet we have no strong evidence
that greater bargaining power would spur innovation.

All
this suggests that the declining bargaining power of workers is at
best only a minor factor behind the decline in average real wages. To
increase UK real wages we need to improve productivity, and that
means not hitting investment on the head with first austerity and
then Brexit. Evidence suggests that the best way to increase
productivity is by raising demand so firms need to invest to meet
that demand. Raining public investment would be the best way to
stimulate aggregate demand.

But
that does not mean that we should not increase the bargaining power
of workers. There seems little doubt that working conditions in some
occupations are pretty bad, and a strong union presence would be an
effective way of improving the working conditions of workers. But I
also think a strong union presence in a worksplace can have a
positive influence on the distribution of real wages.

The
average wage measure in the national statistics include some some
very high wages at the top of the income distribution. Over the last
thirty years the typical or median real wage has fallen by much more
than the average, and that is because
of rising inequality, a good part of which is due to high pay rises
for the top few percent of earners. While some of that is just down
to the rise of the financial sector, some is also within a firm. Andy
Haldane at the Bank of England has also noted
(page 8) that since the 1990s the wage share of older workers has
risen, but the wage share of younger workers (below 35) has fallen.
Furthermore, as Martin Sandbu points
out, it is often inequality in the wage distribution that allows
firms to continue to employ workers on low wages to do things a
machine could do. Some of this growing inequality may have been a
consequence of weaker trade unions.

There
are therefore plenty of good reasons to want to increase the
bargaining power of UK workers. Just don't expect that to have much
impact on the living standards of workers. To raise real wages we
need higher UK productivity, and that will only come from stronger
private and public sector investment.